Oil prices up on rising Red Sea tensions; rebounding after weak 2023

© Reuters.

Investing.com– Oil prices rose in Asian trade on Tuesday, recovering slightly from steep losses in 2023 as U.S. forces struck back against the Iran-backed Houthi group in the Red Sea, with the conflict showing little signs of de escalation.

Reports over the New Year weekend showed that U.S. strikes had killed about 10 Houthi fighters and sank three boats of the Yemeni group, after a series of strikes by the Houthis on several military and commercial vessels in the region.

The Houthis said they had no intention of easing up on the strikes, which they claimed were in retaliation for the Israel-Hamas conflict. Iran also rejected calls to end its support for the group, with Tehran sending a warship into the Red Sea on Monday.

Disruptions in the region, particularly in shipping routes through the Suez Canal, had spurred some gains in oil prices earlier in December.

But oil prices marked a dismal final trading week of 2023, as the launch of a U.S.-led task force to enforce security in the region saw an increasing number of shipping firms resume routes through the Suez Canal.

Brent oil futures expiring in March jumped 1.2% to $77.94 a barrel, while West Texas Intermediate crude futures rose 1.1% to $72.60 a barrel by 20:22 ET (01:22 GMT). Trading volumes were dull with some major markets still closed for New Year holidays.

Oil prices mark steep losses in 2023, outlook dim

Both contracts shed over 10% each in 2023, coming under pressure from persistent concerns over sluggish demand and higher-than-expected supply conditions. An economic rebound in top importer China failed to materialize in the year, while production cuts from the Organization of Petroleum Exporting Countries and allies (OPEC+) largely underwhelmed markets.

Weak economic data from China also continued to pile in, as purchasing managers index readings for December showed more deterioration in business activity- particularly the manufacturing sector.

But the steep annual losses in crude attracted some bargain buying at the beginning of the new year. Traders also held out for any more production cuts from the OPEC+, although signs of discord in the production group- after Angola’s unexpected exit- kept expectations low.

With U.S. production remaining at record highs in recent weeks, global oil markets are expected to be less tight than initially expected in the first quarter of 2024. This notion, coupled with signs of weakening demand in China, is expected to keep oil prices subdued.

Still, crude prices may see some near-term relief amid growing optimism over early interest rate cuts by the Federal Reserve. Nonfarm payrolls data due this Friday is expected to provide more cues on the path of interest rates.

A weaker dollar also afforded some strength to oil prices.

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